Tuesday, July 31, 2007

The mark of an original thinker may be that you never know how they’re going to answer a question you’ve never heard them get asked.

That’s how NotMakingThisUp started a recap of the private equity discussion at this year’s Berkshire-Hathaway annual meeting, which came about when a shareholder asked Warren Buffett—The Oracle of Omaha—this simple question about the private equity mania then raging across the land:

“What could cause it to bust?”

The shareholder's question seemed entirely reasonable and timely, given the fact that we had as recently as February seen the classic “cover story” top-of-the-market headline from Fortune Magazine, about the Blackstone Group and its top Alpha Male, Steve Schwarzman:

Wall Street’s Man of the MomentIn the 1980s, Wall Street Power brokers wore red suspenders, dined at Le Cirque, and made their money in junk bonds and arbitrage. A decade later they wore polo shirts and played Foosball at the venture capital firms that line Silicon Valley's Sand Hill Road, reaping billions from tech. Today Wall Street's newest titans can be found every Monday morning gathered around a long, slightly scuffed conference table in a windowless boardroom high above Park Avenue, the home of the Blackstone Group.

Wearing white shirts and pinstriped suits that underscore their HarvardBusinessSchool credentials, Blackstone's top dealmakers have learned well the techniques pioneered by previous masters. What makes them different is that they also happen to dominate the iconic business of this decade - private equity.

The rest of the article was highly predictable, having appeared in various forms regarding various Masters of the Universe overseeing various Thousand Year Reichs including, but not limited to, Drexel Burnham, Enron and Tyco.

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Indeed, anybody with more than ten minute’s experience on Wall Street, upon reading that article, should have experienced shivers of precognition that the end of the private equity mania was in sight, if not immediately overhead.

But not Warren Buffett. Here’s how we reported it:

As it turns out…Buffett doesn’t think the private equity mania is a bubble, despite, in my view, all the evidence to the contrary, what with everything from deeply cyclical semiconductor companies to fashion-dependent retailers being leveraged up with the kind of debt loads that would make Donald Trump nervous.

In fact, Buffett said the whole private equity thing “isn’t really a bubble.”

While he did bemoan the high prices the private equity wizards were willing to pay—making it harder for him to put Berkshire-Hathaway’s ample cash to work—he did not seem to think the mania was unsustainable, citing the fact that private equity investors lock in their investors for years as being a bulwark against some kind of dramatic end to the feeding frenzy.

“It takes many years for people to take their money out” of private equity funds. Thus Buffett makes the subtle distinction between a mania that might well end in disappointment for all concerned, and one likely to end in a crash.

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Perhaps back then (this was early May) Buffett did not contemplate the hysterical buildup to the June 22 IPO of Blackstone Group—poster child of private equity’s self-proclaimed “golden era”—in which a private partnership whose income consists largely of one-time gains on asset sales would go public at a valuation approaching that of the highly diversified, recurring-revenue generating Lehman Brothers.

Or perhaps Buffett did not look more deeply into his argument that the bubble couldn’t “burst” simply because the buyers wouldn’t get margin calls, and ponder whether the bubble could burst because the buyers’ financiers would indeed get margin calls.

Or perhaps he was just being nice about it.

But he was wrong.

For now that the music has stopped, the investors who have committed their funds for “many years” are stuck; the banks who committed many billions of dollars for short-term bridge financing are stuck; and the poor shlubs who bought Blackstone Group on the IPO are probably wishing they’d never read Warren Buffett’s “all-clear” on private equity.

The private equity bubble has burst, and nobody knows how it will end. But one thing we can take to the bank: trust Warren Buffett to pick through the debris and find the values.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Thursday, July 26, 2007

We here at NotMakingThisUp have it on good authority that Dave Chappelle, who I personally think is one of the few actually funny comedians making a living as comedian these days, learned to use an iPhone last night at a hotel in the general vicinity of Washington, D.C.

(Is there anybody else out there besides me who finds Will Ferrell distinctly not funny, no matter how funny Will Ferrell tries to be?)

Furthermore, the iPhone which Dave Chappelle learned to use last night—or, more accurately, very very early this morning—was the same iPhone which NotMakingThisUp subjected to the highest standard of consumer product testing in the world recently, when we let a bunch of teenagers use it for two weeks.

(I realize Will Ferrell has an appealing persona, and he does have that thing going with his face where he always looks to be on the verge of doing or saying something extremely funny…)

As reported here, the teenagers decided the iPhone was extremely cool.

Dave Chappelle likewise found the iPhone extremely cool, according to the eyewitness report we received at approximately 2:30 this morning. Our eyewitness showed Mr. Chappelle how to unlock it, check out a YouTube, and take pictures.

During the course of the demonstration, our eyewitness explained to Mr. Chappelle that the iPhone's limited storage capacity did not allow her to download her extensive music collection, which included a number of comedians.

"Which comedians?" Mr. Chappelle asked.

"Dane Cook and Jerry Seinfeld," responded our eyewitness.

"Excuse me," Mr. Chappelle said, then walked over to a railing in the hotel lobby and pretended to throw up.

After ten or fifteen minutes playing around with the iPhone and showing it to several friends, Mr. Chappelle took half a dozen pictures of himself with our eyewitness, selected one he liked best, and erased the rest.

(...but is there a scene in a Will Ferrell movie in which Ferrell says something or does something which actually generates a spontaneous laugh from the audience rather than those Saturday Night Live types of this-is-where-you-laugh reflexive responses?)

We’re not sure what Dave Chappelle thinks of the iPhone's virtual keyboard, nor are we aware that he had any strong opinions on the speed of the AT&T network which our teenager panel found most frustrating, but we do suspect that if Steve Jobs wanted to plant a high-profile iPhone in the hands of an extremely popular public figure, we know what hotel Jobs should send it to.

Will Ferrell was not available for any comments on the iPhone, or his comedic persona, as we went to press.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Tuesday, July 24, 2007

I listened to the Netflix earnings call last night. Or was it the Blockbuster earnings call?

Forgive me—I got confused, because Netflix’s management actually spent more time talking about Blockbuster than about Netflix, or at least it seemed that way.

It seemed that way because Netflix management said “Blockbuster” 17 times during their remarks, but only referred to their own company 11 times.

Now, the Netflix team has a right to be overtly obsessed with Blockbuster, if the fact that Netflix’s subscriber base actually declined during the quarter, despite the company spending $47 million in the quarter to attract new subscribers, is any indication.

In years past, Netflix’s management used to wow Wall Street’s Finest with, and I quote CEO Reed Hastings here,

“…the promise of generating consistent, 50% earnings growth year-after-year over the next several years”

Which is probably why—despite Blockbuster’s recent moves, not to mention the video iPod, YouTube and all the other alternatives to ordering DVDs through the U.S. Post Office—the CFO’s comment that he doesn’t “see it [2008 EPS] being any higher than the current year” was such a shock in certain quarters.

And that shock is the only reason I can think of for the following exchange, between one of Wall Street’s Finest, and Netflix CFO Barry McCarthy, about the recent 2c postal rate increase, courtesy of the indispensable Street Events:

Brian Pitz - Bank of America…Can you talk about going forward, how we should think about the increased costs of mail on a full quarter basis? Thanks.Barry McCarthyOn a per-disc-shipped basis, it's about $0.04, $0.02 each way….

How should we think about analysts asking what 2 + 2 equals? I have my own opinion, but this is a family publication...

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Monday, July 23, 2007

It just so happens I started my business the same week in 1994 that Marc Andreesson and Jim Clark incorporated Mosaic Communications. Mosaic was Netscape’s predecessor. Netscape introduced the Netscape web browser, which, believe or not, kids, didn’t exist back then.

Hard as it is to fathom in today’s highly connected world, there was no Netscape browser, no Internet Explorer, no Google and no broadband.

Information moved by telephone, FedEx and faxes.

And while at the time it all seemed terrifically fast-paced and modern, in retrospect it was unbelievably primitive compared to today. Yet I have to confess to not being a technology geek, or even an early-adopter.

I’m more of a mid-to-late adopter—and a very cautious one at that.

I don’t switch to new stuff as soon as it comes out just because it’s new: it has to work right. Otherwise, cool new stuff just gets in the way of what I’m already doing.

I still, for example, have the same cell phone number I’ve had since I got my first phone at Verizon. On the road, I still use a terribly clunky T-Mobile “Sidekick” internet device because it does instant messaging as if I’m sitting at my desk—and I run my business on instant messaging as well as email.

And I confess here that it took me four years to get an iPod—and then only because my daughters decided it was time to get me with the program and used their hard-earned dollars to buy one as a birthday present.

I switch to new technology only when I know it will work better than what I already have. And new stuff never works the way what you already have works. It takes one or two or three generations to work out the kinks.

Take the iPhone. I hate to say it, but the iPhone doesn’t really work better than what I already use.

Sure, it’s a gorgeous piece of metal and plastic that feels good in your hands. And, yes, the screen is beautiful: you can’t take your eyes off it when there’s a video playing.

And unlike most new-new things that come along, it’s really a piece of cake to figure out. Activating the thing took all of three minutes. I spent the next two hours going through all the different features and never once looked around for an instruction book.

Those iPhone TV ads that show the fingers flicking across the screen, moving stuff around, expanding and shrinking web pages? It really does work like that. The whole thing is sort of magical, actually.

Also, as a pure cell phone, it certainly beats the heck out of my Verizon LG hunk of plastic.

There’s no endless button-pushing to find a phone number: you just scroll with your finger, tap the number you want, and boom, it’s dialing.

Voice mail is even better. As everybody who cares already knows from reading the iPhone reviews, voice mail is “visual”: it shows up like email. You scroll through it with your finger, tap the one you want to hear, and listen.

No dialing into your voice mail and listening to that stupid synthetic voice:

“Please enter your password, then press POUND…I’m sorry, that password is not valid. Please enter your password, then press POUND…I’m sorry, I already told you, that password is not valid…”

(I don’t know about you, but I usually hit the wrong buttons a couple of times.)

“You have…TWO…new voice messages…you have FOUR saved voice messages….you have THREE messages that we deleted without telling you…you have FOURTEEN messages just floating around the system…I’m sorry, did you WANT to do something PRODUCTIVE or would you rather LISTEN to more INANE statistics about your VOICE MAIL before we actually ALLOW YOU to LISTEN to your VOICE MAIL?...”

Text-messaging? No problem, once you get used to typing on the iPhone’s virtual keyboard that everybody who hasn’t got an iPhone seems to hate. (You do get used to it—the worst part is the first day or two when you’re typing user names and passwords for web subscriptions, because that’s when the character-recognition technology, which works great in normal sentences, can’t help you.)

And once you do get used to the virtual keyboard, you don't miss those goofy old-fashioned telephone-type keypads where you have to click each button up to three times just to type one letter…then squint real hard to see whether the “k” you were trying to type is not actually an “l” or a “j”…then click the button again two or three or (if you’re like me) six or seven times, to get the right letter to get the right letter to get the right letter to get the right letter to get the right letter…

Just setting the alarm clock on the iPhone—here I’m picking an entirely mundane feature, I know—is fun. You touch the clock icon, the alarm clock button and the “edit” button, and up pops a virtual alarm clock with rolling counters, like the numbers on a bicycle lock.

You just start flicking the rolling counters to whatever time you want, and that’s it.

Changing the alarm clock on my Verizon LG hunk of plastic, on the other hand, takes nine clicks just to get going.

I am not making that up:

Click “OK.”Scroll past “Contacts” and “Recent Calls” to “Settings & Tools.”Scroll down to “Tools.”Click “Tools.”Scroll down past “Voice Commands” and “Calendar” to “Alarm Clock.”Click “Alarm Clock”Click “OK” for the first alarm.

Nine clicks of the button and I still haven’t actually set the time yet. That takes another three buttons to change and set.

Oh—and the numbers on the iPhone alarm clock are big enough to actually see without squinting and holding the phone in a lightless cave.

There is, of course, a great deal more to the iPhone than the screen, the visual voicemail, the text messaging and even the alarm clock. So much more that my advice to Motorola, in brief, is this:Whatever you are working on, stop.

Whatever this-looks-cool-in-the-lab tinkering your engineers are doing to the latest versions of the RAZR or KRZR or any other embarrassingly un-cool acronym—however “hip” and “with it” and “gnarly” and “boss” you might think those new features could be—you should just forget what they’re doing, tell your engineers and marketing people to go buy a bunch of iPhones and play with them for a while, and start over.

I give this advice with as much sincerity as we here at NotMakingThisUp featured Dell’s terrible service problems well ahead of that company’s fall from Wall Street’s graces (see Dell Screws Up a Good Thing, January 24, 2006), and, likewise, described the empty lines at Home Depot stores across America more than a year before that company’s Board of Directors woke up to the fact that Bob Nardelli’s military-infused operational efficiency initiatives were systemically denuding the stores of customers (Tough as Nails or Merely ‘Bobaganda’?, February 26, 2006).

I honestly believe Motorola—and any other cell phone manufacturer that wants to stay in the business of making cell phones, for that matter—should stop what they’re doing, figure out this iPhone thing, and try to create something entirely new.

The iPhone is to a RAZR what color television was to black-and-white TV, and we all know what happened to black-and-white TVs.

A teenage friend of our daughters who merely looked at a video on the iPhone screen said, “I hate my phone.”

Which brings me to what I think may be the unheralded genius of the iPhone—the feature that, like Solitaire on Windows, makes it easy to get comfortable with an iPhone without knowing much of anything, and renders the whole experience contagious.

It’s YouTube.

Just touch the YouTube television icon on the front screen, click on a video…and the iPhone turns into a small, hand-held television with a beautiful picture, good sound and an I-can’t-take-my-eyes-off-this-thing quality that makes you want to hold it yourself and see what else it can do.

Among our panel of experts—teenagers—the YouTube feature was by far the most compulsively used feature. Tap the button, flick through some videos, find one you want to look at and boom, everybody’s watching TV on the iPhone.

It’s the Solitaire of the iPhone.

But it doesn’t always work. I said near the beginning of all this that the iPhone didn’t really work better than what I already have.And it doesn’t.

The problem is the network. As everybody who’s read a review of the iPhone already knows, it uses the slow 2G AT&T network, not the fast 3G network. And when you’re not near a WiFi network—which is most of the time—the iPhone’s internet often doesn’t work any better than an old-fashioned dial-up modem.

But when it works…it’s beautiful. And the next generation of iPhones will, I presume, be 3G. And the iPhone will be what Steve Jobs said it would be: the internet in your pocket.

I began this series by noting that we here at NotMakingThisUp had given the task of testing the iPhone to the most rigorous panel of consumer product users we could imagine—teenagers.Yet I have spent precious little time discussing the actual results of their actual iPhone usage.

The reason is this: the iPhone’s impact was instantaneous.

They all wanted to see it, touch it, hold it, take pictures with it and then look at the pictures by flicking their fingers across the screen. Being near a WiFi network, they were able to watch a YouTube video and post on somebody’s Facebook.

And that was just in the first hour.

Since then, and despite occasional frustrations with the slow network, they have found it easier to look up directions on Google Maps while driving instead of calling 411.

Also, they have started returning phone calls from their parents, because using voicemail is so simple they actually bother to check it, unlike normal cell phones which make checking voicemails seem, to a teenager, like entering Dante’s Nine Circles of Hell—something to be avoided at all costs.

But the most striking indication of whether or not the iPhone has met the high expectations of our impatient, demanding, technology-literate panel of teenagers is this:I can’t get the thing back.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Wednesday, July 18, 2007

Thanks to the human survival instinct, word spreads very quickly when something’s happening that might affect our well-being—because we constantly watch what other people are doing to see if anybody else has a competitive advantage we’re missing out on.That’s why investors watch the tape for strange movements in stocks and constantly wonder what everybody else in the world knows that they don’t know. And why shoppers standing in line at the supermarket—particularly male shoppers— keep an eye on the other lines, like one of those automatic electronic outdoor surveillance systems, only more efficient.

We want to see if somebody else somewhere in the universe might in fact be moving through whatever line we happen to be in slightly faster.

It drives my wife insane.

And if we male shoppers do see a faster moving line, we perform a quick mental calculation of the inherent cost to our well-being and decide whether it makes sense to give up the line we’re in and go for the open lane, or stay put.It drives my children insane, too. But, hey, it’s important to save twenty or thirty seconds in line.

Of course, that was before the cell phone came along and made all kinds of formerly unbearable activities like commuting and standing in line at checkout counters suddenly productive uses of time. Stuck in line? Whip out the cell phone and check in at the office.

Lines got even more bearable when the Blackberry came along: suddenly we could accomplish work.

And now we have the iPhone, a device that could actually make waiting fun, not just productive...and leads me to the terrific example of efficient markets which occurred the day of the iPhone launch.

The lines at the Apple stores late Friday afternoon were exceedingly long, not only because of the media hype, but because those were the stores that were getting stocked with the precious iPhones. But since I didn't want to sleep on the sidewalk to get one, I tried a few Cingular stores.

And the lines at the Cingular stores—at least the ones I checked—were non-existent.

I knew immediately I wasn’t going to get an iPhone at Cingular, but decided to stop at one and ask when, if ever, they might come in. “We’ll know if we’re getting them by 5:30,” said the guy who was standing around smoking in front of the store.

It was 5 p.m.

There was no way on earth an iPhone would be arriving at his store in the next thirty minutes without somebody, somewhere, knowing about it, which, in turn, would mean everybody would know about it, causing a line to form in front of the store in place of a guy smoking a cigarette. I left for the next store, but it was the same story: no lines and no iPhones.

All in all, the market for iPhones launch was very efficient.

But it was not 100% efficient.

An alert friend surfing the internet that Friday night had discovered a few iPhones still available at one of the less popular Apple stores, went down there and bought one first thing Saturday morning, then shipped it my way.

Now, it’s not the 8 gig version; it’s the 4 gig iPhone. So I haven’t even bothered downloading songs yet and haven’t got a useful thing to say about the iPod-type features of the iPhone.

My interests—and what will make or break the iPhone—are its utility as a phone, and its ability as an internet access device.

As I said previously, we here at NotMakingThisUp have been putting the iPhone through the most demanding consumer testing methodology any leading-edge consumer products company could ever devise.We’ve been letting teenagers use it.

And yet the single coolest thing about the whole experience did not come out of the many strenuous activities of our youthful panel of experts.

Sure, the finger-flicking touch-screen you’ve seen on the television ads is extremely cool, and useful; and the lack of anything but a single button on the front of the iPhone to navigate around the device actually works quite nicely and far better than the endless sets of buttons on my regular old cell phone.

Not even the size and clarity of the screen, which is—and I’m going to use a phrase you might easily dismiss as hyperbole, but it is not—like nothing you’ve ever seen, was as slick as the thing that caused most of the negative headlines the morning after the launch: the activation process.

Eager sleep-deprived buyers who’d waited two or three days in line to be the first on their block to buy an iPhone found they couldn’t use it because they couldn’t get a phone number, or they couldn’t transfer their phone number, or the computers at AT&T were swamped.

Maybe that did happen to a few people. (I talked to a friend in the business who said the problems happened to people trying to transfer business numbers or where Cingular couldn’t do a credit check—which they do before giving you a phone number.)

But the fact of the matter is this: the iPhone’s activation process is, in and of itself, revolutionary—to use an extremely over-used phrase, especially when it comes to Apple products.

In fact, I’d say it’s as revolutionary as the day personal computers stopped being sold strictly at “Authorized Dealers” by FORTRAN-talking young men in short-sleeved white shorts and started being sold at consumer-friendly stores like Best Buy.

The entire activation process worked, for me, like this:

Step 1: I take the iPhone out of the box. No batteries to insert, no user manuals in English, Spanish, French, German, Mandarin, Anglo-Saxon, and Gender-Neutral Flemish. Just a slim, metal and glass iPhone, a thin getting-started pamphlet called “Finger Tips,” and a connector to link it to a computer.

Step 2: I turn on my Mac and discover I need to upgrade my iTunes to the latest version, which I do. This takes maybe five minutes which turns out to be the longest part of the entire process.

Step 3: I plug the iPhone into the Mac using the connector cable provided in the box.

Step 4: Since all my information is already in iTunes—name, address, and credit card—everything I’d normally have to fill out online has already been filled out. The only thing I have to do is click a couple of “I Agree” buttons and pick which plan I want from AT&T.

Step 5: My iPhone is activated. My new phone number appears.

And that, literally, was it. Aside from downloading the latest version of iTunes, it took maybe three minutes.

Now, I might miss the days when I had to go to a Verizon store in order to get a new cell phone, instead of being able to buy the phone online and activate it at home.

I might especially miss signing in at the store—Verizon makes you sign in when you enter their stores using a touch-screen sign-in device even when there is nobody in line and the clerks are waiting for poor shlubs like me to finish the stupid process of signing in.

I might miss touching that glass screen infested with microbes from the sweaty fingerprints of thousands of Verizon customers before me, punching in my name, address, phone number, user name, password, favorite dog, mother’s maiden name, least favorite opera, preferred brand of sneakers and most influential motion picture, simply to get in a line which did not exist when I entered the door but is now so long it appears Verizon is suddenly offering free tickets to a Beatles reunion, with John and George too.

I might even miss—once I get to the head of the line—the helpful sales clerk waving his hand in the general direction of bunch of cell phones tethered to the wall and saying, “That’s what we have.”

And I might miss waiting while he goes into the back room to see if whatever I’ve picked out is “available”—as if Verizon doesn’t have zillions of these things stacked floor-to-ceiling in the back room and he’s not actually sitting around with six other Verizon sales clerks playing “Solitaire” on the computer while they make us all wait.

I might also miss the part where, after the sales clerk comes back with the box and waves it triumphantly because he just won three games in a row, I have to select a new plan because according to the sales clerk the old plan was waaaaaaaay too expensive for what I’ve been doing with the phone even though that’s what the sales clerk told me the last time I was there too.

And I most especially might miss the part where the clerk opens up the box and takes out the phone and the battery and unwraps them and assembles them while telling me how long to recharge the battery and what my security code is and why I should get cell phone insurance.

But I doubt it.

So the first genius of the iPhone is this: no longer will people who buy cameras and televisions and even cars online be forced to shlep down to a cellular phone store and have an hour’s worth of their brief lives wasted by a clerk.

We’ll buy the phone at a store—brick and mortar or virtual—just like anything else made out of plastic, glass and chips. We’ll activate it online and be done with it.

Coming up, our panel of experts—teenagers—will tell us what they like, what they hate, and why they will or won’t go out and buy one.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Sunday, July 15, 2007

I’ve always thought the person who deserves the most credit for the personal computer revolution is not Bill Gates for convincing IBM to use his MS DOS operating system in the original IBM PC, or Steve Jobs for infusing a dumb box of wires and circuits—created by and largely for geeks—with Apple’s “insanely great” consumer-friendly technology innovations like the graphical user interface, the mouse, and plug-and-play functionality.

Instead, I’ve always thought the person who deserves credit for the PC revolution is whoever wrote the “Solitaire” program that comes bundled with every Windows operating system, and whoever was responsible for deciding to ship Windows with “Solitaire” in the first place.

I’m not making that up. I really believe it. Let me explain.

While computers seem fairly intuitive nowadays, that’s only because we grew up on them. We know how to turn them on, how to open a file, get online, play games and generally find our way around—even if we only use 5% of what’s available thanks to Microsoft’s annoying, engineer-driven habit of packing anything we might theoretically possibly need at some point in our lives assuming we were Stephen Hawking.

But “back in the day,” as old-timers will recall, the PC was a frustratingly non-intuitive beast, controlled not by pointing and clicking but by typed 'commands'—incomprehensible strings of words and backslashes each in their own highly specific sequence.If you didn’t type exactly the right string of words with exactly the right number of backslashes, nothing happened. There were no cute little buttons showing miniature trash cans and spreadsheets and mailboxes that helped you find what programs you needed.Worse, once you found what program you needed, there were no tool bars at the top of the screen to lay out your choices when you wanted to add up a column or change the font or print a letter or underscore a sentence.

There wasn’t even a “Start Button.”

You couldn’t cut-and-paste or drag-and-drop, and forget trying to plug a new printer into the thing and get it to start printing actual legible material before your infant child graduated high school.

Of course, all this assumed you were able to buy a PC in the first place, because buying one of the things was an equally non-intuitive process involving “Authorized Dealers” like Computer Factory.

And “Authorized Dealers” like Computer Factory were not exactly consumer-friendly Best Buy sort of places.Instead of being staffed with friendly young teenagers who know how to make eye contact, these "Authorized Dealers" were staffed largely with serious young males in white, short-sleeved shirts who knew a great deal about Star Wars and programming FORTRAN or BASIC, but very little about communicating with three-dimensional human beings.Still, they might be willing to sell you a computer if you spoke in FORTRAN or BASIC or happened to know Star Wars trivia, like who killed Luke Skywalker’s great-uncle in the Battle of Warf-Tweeter, and whether R2D2 was, in fact, Luke Skywalker’s dwarf sister, as Luke confessed he feared in one of the later episodes, “Revenge of George Lucas Milking the Phantom Jedi Empire, Batteries Sold Separately.”

But go to a Best Buy or Target and buy a computer, bring it home and put it together and start using it right away?You couldn’t do it.

It was not until Windows came along—its entire user-friendly way of pointing-and-clicking having been ripped off from the Mac—that average people could at least get a general idea of what a personal computer was capable of doing.

For the first time, a person could turn on the machine and get it to do something without knowing ‘commands.’ And eventually you could go into a Best Buy to look at a Compaq or an IBM personal computer, not some "Authorized Dealer" with pasty-faced guys in a white shirt speaking in FORTRAN following you around.

But you still couldn’t do much on them.You could turn them on, and you could see neat little icons, and you could try to play around with Lotus 1-2-3 (the spreadsheet from which Microsoft ripped off Excel), or WordPerfect (the word processor from which Microsoft ripped off Word), or…well, you get the idea.

But what was the point of opening Lotus 1-2-3 or WordPerfect or whatever else Microsoft would eventually rip off? Even if you could open it, you wouldn't know where to begin.

And that’s where the genius of “Solitaire” came in. Anybody—anybody—could move the mouse pointer over the “Solitaire” button, click, and start to play.

Which is why any time you walked into the computer section of a CompUSA or a Best Buy, you’d see somebody—male, female, young, middle-aged—doing one thing on a computer: they’d be playing “Solitaire.”

There wasn’t much to it. Just click on a few buttons and start playing—but those were things anybody could do. By the end of a game, the most computer-illiterate, non-FORTRAN fluent, never-saw-Star-Wars-and-never-plan-to person knew a little something about clicking on a program to bring it up on the screen; using drop-down menus to start it; and pointing-and-clicking the mouse to play the game.

It made you feel you could at least get the hang of the thing—and that, in my view, was immensely important to drawing consumers into the experience of using a PC.

Which is why, ridiculous as it may seem, I’ve always thought putting “Solitaire” on Windows was a stroke of unappreciated genius.

Now, we’re here to talk about the iPhone.

And you may be wondering how anyone could possibly care less than yourself about “Solitaire” and whether or not Bill Gates or Steve Jobs really deserves to be considered the genius behind the personal computer revolution, and if R2D2 was in fact Luke Skywalker’s dwarf sister.

The reason I dwell on it is this: I believe the clever folks at Apple have included the internet-generation’s version of “Solitaire” on the iPhone.

And I believe this feature—along with several very slick new technological advances, most of which you’ve probably seen on the television ads already—will help the iPhone become as widespread as the PC itself.That is, assuming Microsoft doesn't do what it did with everything else Apple did on the Mac...

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Tuesday, July 10, 2007

While we at Not Making This Up have been relatively quiet in recent days, it's not for lack of something to work on.

(Or, in keeping with the style of our previous post, which included what I believe to be a fairly accurate reconstruction of an internal Fed policy debate, "not for lacking the on-working of something.")

That something is the iPhone, and since we got our hands on one of the first batch to hit the stores more than a week ago, we have been testing it using perhaps the most rigorous methodologies of consumer products testing available in the world today.

Specifically, we've been letting teenagers use it.

Our conclusion, which may surprise readers of this blog, will appear shortly.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Monday, July 02, 2007

The credit derivatives market is imploding. There is no overstating the issue: it’s imploding as you read this.

A phenomenon that was supposed to have been contained inside the definitional boundaries of “sub-prime” mortgages is spreading across all classes of debt, now that the formerly gluttonous consumers of dubious paper have reached their limit.Stuffed to the proverbial gills, the former buyers have pushed away the scrap-filled mortgage plate on the table before them and are refusing offers of all sorts of paper, sub-prime or not.

Thus we read about the suspension of debt offerings by not just highly leveraged buyouts such as U.S. Foodservice and Myers Industries, but also proper corporate debt-issuers, such as steel giant Mittal's newest acquisition, Arcelor.

Even companies you’ve never heard of are having a hard time accessing capital.

One such is Magnum Coal, a West Virginia company about which we have no facts to report owing to the fact that the company has the least informative corporate website in the industry, hands down.

What we do know is that Magnum is a large Central Appalachian coal producer, and while Central Appalachian coal is wonderfully low in sulfur and high in BTUs, it also tends to be found underground. Thus, Magnum's key asset is only recovered by union workers toiling in dangerous environments.The company recently delayed a third-of-a-billion junk bond deal.

Another lesser-known victim of the credit seize-up is Catalyst Paper, a Canadian company whose business has been in something of a down-cycle lately—last quarter’s $14 million (Canadian) EBITDA being less than the $18 million of interest expense reported on page 22 of a very lengthy press release.

Catalyst recently pulled a fifth-of-a-billion junk bond deal.

What happened in sub-prime has most indisputably not stayed in sub-prime.

Of course, nobody wants to shout ‘fire’ in a crowded movie theater, least of all the Federal Reserve Board, which, like Hitler in his bunker, appears to believe it is still in control of the forces unleashed by Alan Greenspan’s free-money policy of some years back, which triggered the whole you-too-can-afford-this-house mortgage mess now showing up on the balance sheets of major Wall Street brokerage houses..

Nevertheless, you might expect a bit more of a reaction out of the Federal Reserve Board than merely eliminating the word “elevated” from its interest rate policy statement.

Yes, while the Chinese call on natural resources takes commodities to new highs, and Russian oligarchs and Middle East sheiks bid up all manner of assets, both hard and soft, leaving U.S. consumers fully employed but tightly squeezed, the members of the Fed are literally tinkering with adjectives.

Herewith my reconstruction of the dialogue among Fed policy bigs as they prepared their most recent missive to the outside world:

Chairman: “Last month we said ‘economic growth was moderating.’ We have a motion before us to replace ‘moderating’ with ‘slowing.’ The motion has been seconded. The floor is open for discussion.”

1st Board Member: “Because we’ve never used ‘restrained’ and I’ve always wanted to use ‘restrained.’ (He lapses into a reverie, as if quoting from a book.) ‘She restrained herself as his strong hands grasped her heaving shoulders—’”

Chairman, interrupting: “Er, that’s fine, thank you. But I don’t care for ‘restrained.’ The markets might worry. They might think that we think that something is restraining growth that needs to be un-restrained.”

3rd Board Member: “Mr. Chairman, forgive my impertinance, but, is ‘un-restrained’ a proper word?”Chairman, a bit testily: "Well I believe so. I'm almost certain... I recall we used it during the Barings crisis of '94..."

2nd Board Member: “I’ll look it up.”

4th Board Member, quite grumpy: “Jesus God, what are we doing here? Can’t we just say ‘The economy is okay and if things change we’ll let you know’?”

Chairman, calmly patronizing: “Please settle down. The discussion will continue while the word ‘un-restrained’ is being looked up.”

3rd Board Member: “Is ‘being looked up’ proper English?”

1st Board Member: “I think that depends on whether ‘up’ is being used as an adverb or preposition.”

4th Board Member: “This is absurd.” (He rises from the table, refills his coffee cup from a pot on the credenza, and stares out the window at the traffic on Pennsylvania Avenue.)

3rd Board Member: "Shouldn’t we really say, ‘being up-looked’?”

5th Board Member: “Frankly, I thought the proper usage was ‘Up which it is being looked’.”

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.